As I am a director of a limited company a large percentage of my earnings come in the form of dividend income so I was wondering whether it is allowable to cover dividends on an Income Protection plan?
How Insurers View Protecting Dividends
Naturally it depends on the insurer but it is generally absolutely fine to insure dividends on a long-term income protection plan. Insurers understand that dividend income forms a significant proportion of earnings for company directors.
Personal Income Protection
On a personal plan, it is usually possible to cover up to 65% of your gross (pre-tax) personal earnings, which mainly consists of salary plus dividends.
Some insurers do limit the maximum amount of cover to 50% of gross income so setting the amount of cover within this limit would enable far more insurers to provide competing quotes.
Director Income Protection
With an Executive Income Protection plan, it is usually possible to cover up to 80% of gross earnings and the benefit paid by the insurer would incur income tax (and National Insurance).
With this method of taking out cover the company would pay the premiums and the cost can usually be put through as a business expense (please consult your accountant for advice on this matter).
It is important to note that some insurers would average both salary and dividend income over the last 3 years whereas others would just take salary and dividends over the last 12 months. This can therefore represent an important factor to consider when deciding which insurer to go with if your earnings fluctuate from year to year.
Essentially, these insurers want to cover a consistent level of income over time in order for you to maintain living standards.
For more information please see the page: Directors Income Protection